Wednesday, April 01, 2015

Do we need EU regulation to open up trade in Europe? Mutual recognition versus Harmonisation

Published in Liberaal Reveil, the magazine of the Dutch Telders Foundation

How to open up markets in the European Union? There
basically are two ways to do it. Take the example of architects. How do we make
sure an architect from Poland can be active in France?

Roughly speaking, one way is for France to remove all
protectionist aspects of its regulation for architects so Polish architects can
operate in France, while of course still respecting all regulations concerning
health, safety and consumer protection. Thereby both countries “mutually
recognise” each other’s standards. Trade is about trust.

Another way is for the European Union to harmonise
rules for architects, so these are the same all over the EU.

Of course, in reality, there are many shades of grey.
There are minimum- and maximum- harmonisation, and to achieve mutual
recognition, sometimes it’s even needed to issue EU directives, as was actually
the case for architects.[1] For the sake of clarity, in what follows
underneath, “harmonisation” will be understood as “the creation of new rules at
the European level”, whereas “mutual recognition” will be understood as “merely
scrapping protectionist elements of national regulations”, recognizing that in
reality we often see a mix.

Hereunder I provide an overview of how opening trade
in Europe became more and more about harmonisation, why that is not a good
thing, and what to do about it.

I.History:

The Treaty of Rome, signed in 1957, foresaw a
transition period whereby countries only retained their veto in common decision
making for a certain period of time. When the transition period came to its end
and majority voting was due to be introduced, in 1965, France refused to send
any representatives to Brussels, as a means of protesting this, leading to
the “Empty Chair Crisis”.[2] With
the so-called “Luxembourg compromise”, it was agreed that in questions of vital
interest member states retained a veto right[3].
This was a non-legally enforceable political veto, watered down[4] in
the 1980ies, which could be used in areas of majority voting. It shouldn’t be
confused with circumstances in which member states still retain a legal veto
right.

In 1979, a very important principle was established by
the European Court of Justice (ECJ) in its Cassis de Dijon – ruling[5],
declaring that under European law, if a company is allowed to make a product
freely available for sale in one European Community country, then it must be
allowed to do so in all member states. The product involved was in this case a
French liquor, which had an alcohol percentage of 15%, while German law banned
any fruit liquor with an alcohol percentage lower than 25%. As not many German
liquors would violate this particular German law, the Court ruled that such a
restriction was de facto protectionism through the back-door.[6]
The French company won the case, but France wasn’t overly happy with the
result. The Court, which left some room for exceptions[7],
had hereby established more firmly the so-called principle ofmutual recognition, and the French
government could already imagine that many of its own regulations would be
branded protectionist and illegal under European law.

Given that returning to a context of national borders
made even less sense in the 1980s than in the 1950ies, the obvious solution for
this was to draft more rules at the European level, if having all these rules
at the national level wasn’t possible then. As Jens-Peter Bonde, an MEP for
Denmark for 30 years, puts it: “The verdict
forced the member states to agree on common standards to which they would
otherwise not have agreed. It paved the way for decisions by qualified majority
under the so-called Internal Market, introduced by the Single European Act in
1987.”[8]

So in order to easy rule-making at the European level,
veto powers were being scrapped by this “Single
European Act”, which set the objective to establish a European “single market”
by 1993. A laudable aim, but in order to achieve this, the Treaty extended
Qualified Majority Voting to new areas[9],
something which was repeated in every European Treaty ever since. It also introduced
the so-called “cooperation procedure”, empowering the European Parliament, an
obsessive cheerleader of ever more regulation.

Like many who support the creation of
a single market, Margaret Thatcher supported the Single European Act, believing
harmonization was needed to open borders. It has now become clear for even the
proponents of this approach that there is a heavy cost to this. Parallel to the
growth of the body of European harmonised rules, the approach to open up trade
in Europe through mutual recognition was continued[10].
Hereunder follows an overview of the
downsides of harmonisation, the benefits of mutual recognition and what can be
done to boost the use of the latter.

II.The Problems with Harmonisation

-1.
The high cost of harmonisation’s “one size fits all” – approach

When making laws for 28 diverse economies, covering
500 million people, there is a greater risk that regulation doesn’t suit local
needs and imposes a high cost as compared to when regulation is decentralized.
Also, making new rules at the European level increases the risk that these
contradict national rules, leading to regulatory overlap. Even if in theory
European rules then trump national ones, this increases legal un-clarity and
uncertainty.

We can witness this when looking at figures. Large-scale
research[11]
by Open Europe has concluded that the cumulative cost of EU regulation
introduced between 1998 and 2008 for all 27 EU member states is €928 billion,
which is 66% of the €1.4 trillion which all national and EU regulation
introduced during that period has costed. By 2018, over a 20 years period, the
cost of EU regulation introduced since 1998 is estimated to have been risen to
more than €3.017 trillion. This is over €15,000 per household in the EU.[12]

It must be said that this investigation only focuses
on the cost of regulations, derived from so-called “regulatory impact
assessments”, which is an imperfect estimate. It ignores any benefits of
regulations, which in theory may be greater than the costs. However, more
recent Open Europe research concluded that for 24 of the 100 EU rules that are
most costly to the UK, estimated costs outweigh estimated benefits[13],
again according to official government estimates, which already have a tendency
to present the situation slightly rosier than assumed.

That 66% or two thirds of the impact of regulation in
the EU comes from the EU level should
moreover give some pause for thought. Are two thirds of problems in Europe
really of such a nature that a common solution for 500 million people is
needed? Don’t think this is all the result of some conspiracy by eurocrats in
the European Commission in Brussels. Member states play an important rule in EU
decision making, and are often very keen to decide rules in Brussels, rather
than at home. For example, the ban on traditional light bulbs[14]
would have been facing much more opposition in London and Berlin than it did,
because it was decided at the European level. In Brussels, there is less
scrutiny by the media or national parliaments.

When national electorates found out, a lot of
criticism against the measure emerged, resulting in Germans hoarding
traditional light bulbs. But it was too late. For a politician, there is a
great incentive to prefer policy making in Brussels over the national capitals,
if one wants to have an easy time implementing policy.

In Brussels, the European Parliament[15]
is supposed to be a check on the legislative process, given that there is a
lack of sufficient scrutiny by the media and national politicians. However, instead
of restraining the Commission’s machine, it acts as an extra motor to encourage
it. The very least one could expect from this institution is that it would
refuse to provide discharge to the EU Budget at least as long as the EU’s own
auditor, the Court of Auditors, refuses[16]
to provide a positive statement about EU spending for 20 years in a row now[17],
due to the unacceptable high level of errors in EU spending. To refuse discharge has been the position of
the Netherlands, the UK and Sweden in the last four years[18].
The Parliament on the contrary consistently calls for a bigger EU budget. The
EP gained a lot more powers with the Lisbon Treaty. Unsurprisingly, it is
possibly even worse in ignoring its role of restraining the regulatory machine
than it is in controlling the use of EU funds. Only in 2013, the institution
voted to ban chocolate cigarettes.[19]

That two thirds of the impact of rules in the EU is
coming from the EU level is a much more rock-solid claim than all kinds of
other figures floating around, which either ignore local regulation and thereby
overestimate the power of the EU, or do not take into account indirectly
applicable EU regulation.[20]
These are of course all rough estimates, but very few dispute that the European
regulatory machine is out of control. The European Commission itself admits
this, as it has on regular occasions, in 1996, 2005 and 2013[21],
launched large scale attempts to cut EU red tape. These laudable attempts
haven’t been very successful, unlike some attempts at the national level. It
emerged this year for example that the UK government’s cuts to red tape over the last five years were
entirely undone by new EU regulations which came into force in the last two
years alone[22].

There is some cause for
hope, however. The second man in command at the new European Commission, former
Dutch Foreign Minister Frans Timmermans, is responsible for “better
regulation.” No-one should be naive about what one man can do to change the
culture at the European level, but it is the most high-profile attempt at that
level to do something about this problem.[23]
His initial attempts to single out 80 legislative proposals for withdrawal or
reworking[24] were already met by
fierce opposition[25],
not least by certain member states, who for example opposed his idea to ditch
the proposal for an EU-ban on plastic bags. It only goes to show that the root
of the problem is not just in Brussels, but also in national capitals, who
sometimes like to abuse the European Union as a means for imposing regulations
they couldn’t pass as easily at the national level.

-2.
It’s harder to change EU rules than is the case with national rules:

Industry lobbyists are often quite keen on harmonisation.
They see the immediate benefits of countries having to adopt rules which
lobbyists can easily influence at the European level. They however forget that
once these rules are in place, in order to change them, one needs to go through
the whole European legislative machinery again: the European Commission must
issue a proposal, in most cases the European Parliament must have its say and
28 governments need to agree on changing it. The long-running discussion of
changing the so-called “posted workers directive” can be an indication. This
directive allows workers to work in other EU member states for a certain period
as long as they comply with the social rules of their home state. While
favoured by Britain and the central-and Eastern member states, social democrats
in the old member states have been long been calling for changes. Only at the
end of 2013 a minor deal was reached to change it. Industry lobbyists may think
they’ve scored a victory when a regulation is finally drafted in a way they
like, but this may backfire when as a result of technological or economic
changes a regulatory change is needed. Such a regulatory change is then much
more likely to happen at the national level.

-3. There is a higher risk of “regulatory capture” with
harmonisation than with mutual recognition

For interest groups of all brands, it is much easier
to shape legislation when new rules are being discussed than when the focus is only on
removing protectionist elements of national regulations. The phenomenon of
“regulatory capture”, whereby interest groups have a vast influence over policy
making, can be witnessed both at the European and national level, but it is
most harmful when it happens at the European level. If a new innovative company,
like taxi ride share provider Uber, for example, wouldn’t be active on the
Italian market, due to the lobbying power of the Italian taxi sector, that is
bad enough, but if Uber would succeed to break into only one European country,
using its success there to convince other countries after that, also Italy
would ultimately have to open its borders. If Uber would be banned by the EU,
this dynamic wouldn’t exist.

-4. Regulation is better if tested in 28 different
jurisdictions, rather than only in one

The chance that one gets it right after 28 attempts is
higher than after only one attempt. The examples of again Uber or Airbnb, a
website for people to rent out lodging, can illustrate this. Everywhere in the
world, and also in Europe, national and regional regulators are struggling to
adapt their old legislative framework to the advent of these newcomers.
Governments will learn from each other and copy the regulatory response of the
member state which is most successful in its venture to integrate new
technologies. If the EU would have the power to decide the regulatory treatment
of new technologies, the chance choosing incorrectly is so much higher. This is
currently visible in the discussions on whether to allow genetically modified
organisms (GMOs), where the EU does have competence and has imposed stringent
regulations[26], strangling this
potentially lucrative industry, while the rest of the world is steaming ahead.
Luckily, more powers over this choice were recently handed to national
authorities[27], but only after years of
unfruitful discussion, also boosted by the EU’s adherence to the so-called
“precautionary principle”, of which some claim[28]
that we wouldn’t have enjoyed inventions as the aspirin, if this principle had
been applied back in the days.

-5. Harmonisation is questionable democratically, given
how it boosts the power of technocrats

One particular problem with drafting harmonising
regulations which are meant to cover 28 different countries with 500 million
people is that a lot of details need to be worked out. As a result of that, a
very opaque system of implementing regulations, called “comitology”[29]
has been developed at the European level, providing bureaucrats with often
enormous powers. A Dutch PhD thesis investigating comitology came to the
conclusion that not less than half of the content of regulations was being
decided through comitology, which is supposed to be only about implementing
rules. So to recap: two thirds of the impact of rules is decided at the EU
levels, according to official regulatory impact assessment data, and half of
the content of these rules is decided by bureaucrats in obscure committees
after the actual decision has been made by the European Parliament and the
Council of Ministers. Welcome to Europe.

The last big revision of the EU Treaties, the Lisbon
Treaty, contained some reforms of the Comitology system, but these are deemed
to have increased[30]
the powers of the European Commission, an institution which already enjoys vast
powers and even a monopoly to propose EU legislation. Most infamously, the
proposed EU ban on (non-standardised) jugs of olive oil, was passed through
comitology, before it was withdrawn[31]
after having been ridiculed in the media.

In EU-regulation we can see a lot of use of ‘technical
standards’, which supposedly aren’t of a politically sensitive nature, but these
have a worrying tendency to become politicized, which was the case with EU
rules on banker bonuses.[32]

-6. Harmonisation can easily lead to competence creep,
dangerously wide interpretation of rules and more powers for unelected judges
in Luxembourg

In the case of mutual recognition, not much more is
needed than to identify which elements of national regulations are
protectionist. This may lead to political and even judicial discussions, but
nothing compared to similar discussions in the field of Harmonisation, which brings
new regulations into life, which then need to be interpreted. This can lead to
situations whereby member states do not apply the rules in the same way,
leading to unfair competition.

When the EU banned battery cages for hens, for example,
the measure was implemented by the UK and some other countries, Spain, France,
Poland admitted not be ready to drop battery cages, despite having had 13 years
to prepare for the change, leading to unfair competition, something the
European Union is in theory not supposed to create, but to erase[33].

Another consistent feature is that the rulings of the
European Court of Justice (ECJ) in Luxembourg have radically changed the
meaning and scope of EU rules – in various EU policy areas, typically expanding
the reach of EU rules[34],
not least because being activist is in the DNA of the ECJ, which has been
dubbed “the least accountable and least representative institution of all”.[35]
Just like the European Parliament and the European Commission, the ECJ’s powers
have been boosted by the Lisbon Treaty.[36]
One way to restrain the ECJ would be to create an intergovernmental “EU
Subsidarity Court”, to which the ECJ would be subject to in matters of
distribution of competences.

III.The benefits of Mutual Recognition:

-1. Absence of expensive regulation

All the costs related to harmonisation listed above wouldn’t
exist if the path of mutual recognition of norms was chosen to open up trade in
Europe. Most importantly, there is of course the high cost of many of these
rules. In today’s world, with its global supply chains, the benefits of
releasing European industry from crumbling regulations are perhaps even higher
than assumed, as benefits would extend outside of Europe. As already mentioned,
it’s true that sometimes regulations also bring about benefits, but given that
official government data already indicate that this isn’t so in one in four
cases, it is hard to underestimate the economic benefits which would result
from a fundamental cleaning up of the European regulatory rulebook.

-2. More regulatory competition, which isn’t
necessarily less regulation or a “race to the bottom” of regulatory standards:

As explained above, mutual recognition allows for competition between
states in order to create the best regulatory environment. Member states can
still issue very stringent regulations, but as long as they’re not
protectionist. Germany can ban cigarettes, if it wants to. It just isn’t
allowed to ban “French” cigarettes. The absence of harmonisation doesn’t
necessarily mean that there will be less regulation. In discussions about EU
rules for capital standards for banks, a prominent example of EU harmonisation,
the UK and Sweden had to push very hard in order to be allowed to impose
capital standards on banks that were more stringent than prescribed in the
original proposals for harmonisation[37].
If this issue would have been left to the member states in a framework of
mutual recognition, the liberty of both countries to regulate its banks more
fiercely than France and Germany would not have been endangered.

Separately,
it should be noted that there isn’t much compelling empirical evidence for
fears that regulatory competition would lead to an undesirably low level of
regulation[38].
If there is one thing we cannot accuse national politicians in Europe of, it is
a reluctance to issue rules and regulations. A study by Grant Thornton[39]
concluded that Poland was Europe's undisputed leader in volume of new
legislation, at least when calculating in number of pages, closely followed by
France.

-3. Without harmonisation, there is a lower risk of
regulatory capture

Special interest groups would have a harder time to get their way if so many
regulations weren’t decided at the European level. They surely would still
lobby fiercely in favour or against removing protectionist elements in national
regulations if mutual recognition would be the dominant practice. In itself,
there is nothing wrong with lobbying. On the contrary. It’s hard to imagine how
poor law making would be without the input of the industry which will be
burdened by those laws, especially when it comes to very technical product
standards and regulations. Of course, industry would prefer that no burdensome harmonising
measures would be taken, but given that they are, they may as well try to shape
them.

IV.How to boost the method of mutual
recognition again and improve harmonisation?

There are many ways to support the use of mutual
recognition and to stop the EU’s regulatory machine. In order to get rid of
many burdensome regulations, there is only one, very complicated way:
renegotiating at the EU level, apart from hoping that technological development
will make some of these regulations redundant. Perhaps making it easier to
abolish old EU rules than to make new ones would be an option, but this may be legally
tricky. There are many ways to prevent expensive EU rules entering into force
in the future, however. For some of them, Treaty change is needed.

-1. Restoration of vetoes for member states in the EU
Council of Ministers

If 28 member states can exert a veto,
it will become harder to agree on new EU legislation, thereby forcing mutual
recognition as an alternative approach to the forefront. This would increase cross-European
support for EU-rules and would be an extra safeguard against bad rules. There
would be a flipside, however: it would also become harder to abolish EU
rules.

- 2. Restricting what
the Commission can do

One way would be for the member states to set an
exhaustive and tightly‐defined agenda for the EU Commission,
which has a monopoly of initiative to prepare EU rules. Anything not included
in this, would be off-limits and a competence of member states. The ongoing
attempt to harmonise taxes through harmonizing the tax base[40],
for example, is a proposal which is constantly being recycled by the Commission
but of which member states have always made clear they don’t think it’s any of
the Commission’s business.

-3. Red cards for national parliaments:

Equipping national parliamentswith a veto, a ‘red card’, would give
the current ‘yellow card’ system whereby national parliaments can force the
Commission to rethink proposals binding teeth. The yellow card system has only
used a few times. It was introduced by the Lisbon Treaty, stating that if one
third or more national parliaments object to an EU proposal on subsidiarity
grounds (within an eight week window), then the Commission has to reconsider
the proposal. In the case of the yellow card against the so-called “European
Public Prosecutor's Office (EPPO)”[41],
the Commission basically ignored[42]
the opposition from eleven national parliaments. So did the European
Parliament, which is even less surprising. Respect for subsidiarity is unlikely
to materialize in practice as long as it remains the responsibility of EU
institutions to enforce it.

-4. A Subsidiarity Court

The creation of an intergovernmental “EU Subsidarity
Court”[43],
to which the European Court of Justice (ECJ) would be subject in matters of
distribution of competences, could help to restrain the judicial activism of
the ECJ[44]
which leads to EU ‘competence creep’.[45]

Unlike now, it would become possible to appeal ECJ
rulings, but only on the grounds of subsidiarity issues. Important is that this
Court would be directly composed by either the presidents of national
Constitutional Courts or representatives appointed by governments. In the
latter case, not much would change, but if for example the President of the
German Constitutional Court would have a seat in there, there would be an
institutional link with the national judicial order.

Of course, this could as well fail to serve as a
safeguard, but at the moment the ECJ is completely unrestrained, apart from the
possibility for member states to nominate a judge for a period of six years, although even this is subject to formal
approval by the other member states.

-5. A Subsidiarity Commissioner

To a large extent, the idea of a “Subsidiarity
Commissioner has now been implemented with
the arrival of Frans Timmermans as second in command in the Juncker-Commission,
responsible for “Better Regulation”. It is his job to scrutinize whether
legislative proposals respect the subsidiarity and proportionality principle
and to become unpopular with his colleagues, as for example Energy Commissioner
Canete, who saw 62 of his 64 proposals axed[46]
by Timmermans last year. If Timmermans is successful, he should ultimately
become popular with the public, of which only 19% is happy with the EU at the moment.[47]

-6. Improve harmonisation

In certain cases, harmonisation is needed and even in
the cases where it isn’t needed, there are ways to minimize the burden it
imposes. Suggestions made by Open Europe include “one in, one out”
arrangements, sunset clauses, common commencement dates for regulation, expiry
dates, improved impact assessments, the creation of an independent impact
assessments board and simplification of procedures to scrap regulation.[48]

Conclusion:

In short, harmonisation or the creation of new rules at the European level should be limited to exceptional cases. The focus
should instead be on mutual recognition of national rules, by scrapping
protectionist elements from these rules.

The EU’s attempts to open up borders between member
states for the delivery of services illustrates this point. The original
version of the services directive contained the idea to install the so-called “country
of origin principle”, meaning that service provides who would comply with the
regulations of their home country would be welcome to operate in other member
states. This was effectively an application of mutual recognition. As a result
of opposition by Belgium and France, fearing the arrival of the so-called
“Polish plumber”, it was watered down in favour of a system which allowed
loopholes[49] for member states not to
open up their services markets, which they have been gratefully exploiting. As
a result, implementation has been patchy at best, with many barriers still in
place. A new attempt to open up services in the EU should therefore include the
“country of origin principle”. Open Europe calculated that if only the twelve
countries who in 2012 declared to be willing to open up their borders for
services would do so amongst each other, through “reinforced cooperation”,
about half of the economic benefits would materialise as compared to when all
EU member states would do that. The “Polish plumber” would still not be welcome
in Germany or France, who wouldn’t have to do something they don’t want, while
he or she would be welcome in Sweden, Italy and the UK.[50]

At the moment, a very similar discussion is raging
with regards to the Transatlantic Trade and Investment Partnership (TTIP), a
trade deal under negotiaton between the European Union and the United States. A
lot of TTIP-critics complain that it will impose deregulation through the
back-door. It’s too early to tell if this will be the case, but TTIP-negotiators
know what they should do: not imposing regulation or deregulation, but removing
barriers to trade. TTIP shouldn’t be about keeping China out of the trade
system and imposing common Western standards on the rest of the world. It
should be about helping businesses to expand their transatlantic activity, so
wealth is created which enables to boost trade between China and the West even
further. When the principle of mutual recognition has prevailed in TTIP, by
limiting it abolishing trade barriers, it’s high time to apply it again at the
European level.